TORONTO (miningweekly.com) – Despite providing a ‘stable’ overall outlook for the US coal industry, Moody’s Investors Service this week sketched a rather gloomy scenario for the next 12 to 18 months, pointing to weak fundamentals as thermal coal demand faltered and steelmaking metallurgical prices remained stubbornly low.

In its 2014 outlook for the US coal industry released on Tuesday, lead author Anna Zubets-Anderson said electricity-generating thermal coal demand was facing a slow, long-term secular decline, while metallurgical (met) coal prices were poised for a slow recovery based on supply reductions – which set the stage for more operations to be idled and workers furloughed.

“We expect production volumes next year to remain the same as 2014, but owing to inter-basin dynamics, I would expect more operations idlings from the eastern basins, where production is declining,” Zubets-Anderson told Mining Weekly Online in an interview.

“Central Appalachia (CAPP) thermal coal production was declining very rapidly, so I certainly expect some more mines to be closed in that region. Met coal prices are very low at 120/t; however, while we do think that it will recover by the end of 2015, we also think that some more cuts would be coming through for that to happen. I think the major curtailings have already taken place, but I definitely don’t think it’s over,” she said from New York.

Many North American operators had in recent months idled unprofitable mines, including top US miners such as Alpha Natural Resources, Consol Energy, Walter Energy and Patriot Coal.

Moody’s added that it expected inter-basin dynamics to remain similar to the previous two years, with Illinois basin (ILB) producers continuing to take market share from CAPP, which would continue its secular decline.

Meanwhile, demand and supply would hold steady for Powder River basin (PRB) and Northern Appalachia (NAPP), with PRB experiencing short-term volatility in response to natural gas price fluctuations.

PRICING PRESSURE

Zubets-Anderson noted that despite expecting metallurgical coal prices to recover somewhat to between $135/t and $145/t by the end of next year, that business would continue to present the biggest challenge to the US producers. The fourth-quarter benchmark price for high-quality coking coal settled at $119/t, essentially identical to the second and third quarters, which were settled at $120/t.

Already at a six-year low, metallurgical coal prices seemed set for a prolonged period of relatively weak prices by historical standards. Moody’s expected that all rated US met coal producers would be stressed at these prices, especially those that acquired assets at the top of the market such as Arch Coal and Alpha Natural Resources.

With their significant cash cushions, they would fare better than producers such as Walter Energy. Peabody Energy was expected to be best positioned given its more diversified operations, while Teck Resources, in Canada, was also well positioned on the cost curve and profitable at current met coal prices.

Zubets-Anderson pointed out that while other coal producers could possibly want to emulate Consol Energy’s timely strategic diversification into natural gas and oils, it was at this stage probably too late to do so, given the significant existing cash-burn rates.

Moody’s expected a further decline in producers' earnings over the next 12 months, as low met coal prices persisted. Coal consumption would decline by roughly 3% in 2015, owing to the US implementing the Mercury and Air Toxics Standards (MATS), while production would remain steady.

Coal's share of electric generation was expected to continue to decline from 40% in 2014 to 39% in 2015, and trend lower over the next decade as more plants were retired and investment turned to natural gas and renewables.

The report expected that environmental regulations would pressure domestic coal consumption for the foreseeable future, as new capacity investment was directed toward natural gas and renewables. Low-cost natural gas and MATS requirements would make many older, coal-fired units uneconomical to operate, resulting in 50 GW to 75 GW of coal plant retirements by 2020.

Further, proposed rules on carbon dioxide emission reductions, if implemented as currently drafted, would also result in coal consumption falling more than 20% in the next decade, in the absence of developments in carbon capture technology.

SEABORNE OVERSUPPLY

Zubets-Anderson said export thermal markets for US coal would remain weak next year, as both the Pacific and Atlantic basins continued to face oversupply and weak pricing, compounded by port capacity constraints on the West Coast, which limited PRB producers' export potential.

Meanwhile, roughly one-quarter of US exports were thermal coal going to Asia, where the market continued to be oversupplied by Indonesia and Australia – the Pacific basin’s two largest exporters – with slower growth in China only adding to this pressure.

The August Newcastle price of $68/t left few US producers competitive in the seaborne markets and Moody’s did not expect substantial recovery over the next year.

ILB and NAPP producers with low-cost longwalls and ample access to ports, such as Foresight and Consol Energy, would probably enjoy the most opportunities in the seaborne markets.

Meanwhile, limited port capacity would continue to stifle PRB coal’s access to the Pacific. Producers today must ship coal through Canada’s Ridley, Neptune and Westshore terminals, which had little capacity for additional US coal. Port operators planned to build nearly 100-million tons of additional capacity at Washington State’s Millennium Bulk Terminals and Gateway Pacific Terminal, but environmental and regulatory roadblocks would probably delay this expansion for several years.

Moody’s noted, however, that it could change its ‘stable’ outlook for the US coal industry to ‘positive’ if coal's share of electricity generation rose above 41%, met coal prices increased above $175 and coal inventories at utilities remained below 165-million short tons. Conversely, the outlook could change to ‘negative’ should coal make up less than 38% of electricity generation, met coal prices persist below $150 and the utilities' coal inventories rise above 185-million tons.